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Derivative contract becomes a chargeable asset

Where a relevant contract ceases to be a derivative contract within Part 7, CTA09/S622 provides that the company is deemed to have disposed of it at the relevant time for its notional carrying value. See CFM50830 for the meaning of ‘relevant time� and ‘notional carrying value�.

It is also necessary, where the contract becomes a chargeable asset, to fix its deemed acquisition cost for capital gains purposes. Therefore, under CTA09/S662, the contract is deemed to have been reacquired immediately after the relevant time for its notional carrying value.

Example

The facts are as in example 2 at CFM50820. The bank draws up accounts to 31 December. On 1 March 2009, it acquires a quoted option to subscribe for shares in A plc for £800,000. At 1 April 2009, when the option has a fair value of £750,000, the bank transfers it from its trading book and subsequently holds it as an investment. On 15 January 2010, the bank exercises the option and acquires A plc shares, which it immediately sells for £1.4 million.

The option is a derivative contract up to 1 April 2009, at which point (because of the CTA09/S591(4) exclusion for quoted options held for non-trade purposes) it becomes a chargeable asset. Under CTA09/S622, the company is treated as having disposed of the option on 1 April at its notional carrying value of £750,000. It must therefore bring a debit of £50,000 into account for Part 7 purposes, in year ended 31 December 2009.

Under CTA09/S662, it is deemed to have immediately reacquired the option for £750,000. When the bank sells the A plc shares in 2010, this £750,000 is treated as part of the acquisition cost of the shares (TCGA92/S144(3)) in computing the chargeable gain that arises on the transaction.